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Chapter 8

Diversification: Strategies for Managing a Group of Businesses


Multiple Choice Questions
The Four Facets of Crafting Corporate Strategy
1. The task of crafting corporate strategy for a diversified company encompasses A) picking the new industries to enter and deciding on the means of entry. B) initiating actions to boost the combined performance of the businesses the firm has entered. C) pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage. D) establishing investment priorities and steering corporate resources into the most attractive business units. E) All of these. Answer: E Page: 239 - 240 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 2. Which one of the following is not one of the elements of crafting corporate strategy for a diversified company? A) Picking new industries to enter and deciding on the means of entry B) Choosing the appropriate value chain for each business the company has entered C) Pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage D) Establishing investment priorities and steering corporate resources into the most attractive business units E) Initiating actions to boost the combined performance of the businesses the firm has entered Answer: B Page: 239 - 240 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

When to Diversify
3. Diversification merits strong consideration whenever a single-business company A) has integrated backward and forward as far as it can. B) is faced with diminishing market opportunities and stagnating sales in its principal business. C) has achieved industry leadership in its main line of business. D) encounters declining profits in its mainstay business. E) faces strong competition and is struggling to earn a good profit. Answer: B Page: 241 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: TB81

Value Creation

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4. Diversification becomes a relevant strategic option when a company A) spots opportunities to expand into industries whose technologies and products complement its present business. B) can leverage existing competencies and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets. C) has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses. D) can open up new avenues for reducing costs by diversifying into closely related businesses. E) All of these. Answer: E Page: 241 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 5. Diversification ought to be considered when A) a company's profits are being squeezed and it needs to increase its net profit margins and return on investment. B) a company lacks sustainable competitive advantage in its present business. C) a company begins to encounter diminishing growth prospects in its mainstay business. D) a company has run out of ways to achieve a distinctive competence in its present business. E) a company is under the gun to create a more attractive and cost-efficient value chain. Answer: C Page: 241 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 6. Diversification becomes a relevant strategic option in all but which one of the following situations? A) When a company spots opportunities to expand into industries whose technologies and products complement its present business. B) When a company is only earning a low profit margin in its principal business C) When a company has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such businesses. D) When a company can open up new avenues for reducing costs by diversifying into closely related businesses. E) When a company can leverage existing competencies and capabilities by expanding into industries where these same resource strengths are key success factors and valuable competitive assets. Answer: B Page: 241 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

Building Shareholder Value: The Ultimate Justification For Diversifying


7. Diversifying into new businesses is justifiable only if it A) results in increased profit margins and bigger total profits. B) builds shareholder value. C) helps a company escape the rigors of competition in its present business. D) leads to the development of a greater variety of distinctive competencies and competitive capabilities. E) helps the company overcome the barriers to entering additional foreign markets. Answer: B Page: 241 - 242 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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8. To create value for shareholders via diversification, a company must A) get into new businesses that are profitable. B) diversify into industries that are growing rapidly. C) spread its business risk across various industries by only acquiring firms that are strong competitors in their respective industries. D) diversify into businesses that can perform better under a single corporate umbrella than they could perform operating as independent, stand-alone businesses. E) diversify into businesses that have either key success factors or value chains that are similar to its present businesses. Answer: D Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 9. The three tests for judging whether a particular diversification move can create value for shareholders are A) the attractiveness test, the profitability test, and the shareholder value test. B) the strategic fit test, the competitive advantage test, and the return on investment test. C) the resource fit test, the profitability test, and the shareholder value test. D) the attractiveness test, the cost-of-entry test, and the better-off test. E) the shareholder value test, the cost-of-entry test, and the profitability test. Answer: D Page: 242 Learning Objective: 1 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 10. To test whether a particular diversification move has good prospects for creating added shareholder value, corporate strategists should use A) the profit test, the competitive strength test, the industry attractiveness test, and the capital gains test. B) the better-off test, the competitive advantage test, the profit expectations test, and the shareholder value test. C) the barrier to entry test, the competitive advantage test, the growth test, and the stock price effect test. D) the strategic fit test, the industry attractiveness test, the growth test, the dividend effect test, and the capital gains test. E) the attractiveness test, the cost of entry test, and the better-off test. Answer: E Page: 242 Learning Objective: 1 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 11. The attractiveness test for evaluating whether diversification into a particular industry is likely to build shareholder value involves determining whether A) conditions in the target industry are sufficiently attractive to permit earning consistently good profits and returns on investment. B) the potential diversification move will boost the companys competitive advantage in its existing business. C) shareholders will viewed the contemplated diversification move as attractive. D) key success factors in the target industry are attractive. E) there are attractive strategic fits between the value chains of the company's present businesses and the value chain of the new business it is considering entering. Answer: A Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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12. The cost-of-entry test for evaluating whether diversification into a particular industry is likely to build shareholder value involves A) determining whether a newly entered business presents opportunities to cost-efficiently transfer competitively valuable skills or technology from one business to another. B) determining whether the cost to enter the target industry will strain the companys credit rating. C) considering whether a companys costs to enter the target industry are low enough to allow for good profits or so high that potential profits would be eroded. D) determining whether the cost to enter the target industry will raise or lower the companys total profits. E) determining whether the cost a company incurs to enter the target industry will raise or lower production costs. Answer: C Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 13. The better-off test for evaluating whether a particular diversification move is likely to generate added value for shareholders involves A) assessing whether the diversification move will make the company better off because it will produce a greater number of core competencies. B) assessing whether the diversification move will make the company better off by improving its balance sheet strength and credit rating. C) assessing whether the diversification move will make the company better off by spreading shareholder risks across a greater number of businesses and industries. D) evaluating whether the diversification move will produce a 1 + 1 =3 outcome such that the companys different businesses perform better together than apart and the whole ends up being greater than the sum of the parts. E) assessing whether the diversification move will benefit shareholders due to gains in earnings per share and faster stock price appreciation. Answer: D Page: 242 Learning Objective: 1 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation

Strategies for Entering New Businesses


14. A company can best accomplish diversification into new industries by A) outsourcing most of the value chain activities that have to be performed in the target business/industry. B) acquiring a company already operating in the target industry, creating a new business subsidiary internally to compete in the target industry, or forming a joint venture with another company to enter the target industry. C) integrating forward or backward into the target industry. D) shifting from a strategic group comprised mostly of single-business companies to a strategic group comprised of diversified companies. E) employing an offensive strategy with new product innovation as its centerpiece. Answer: B Page: 242 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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Acquisition of an Existing Business


15. The most popular strategy for entering new businesses and accomplishing diversification is A) forming a joint venture with another company to enter the target industry. B) internal startup. C) acquisition of an existing business already in the chosen industry. D) forming a strategic alliance with another company to enter the target industry. E) None of the abovestrategic alliances and joint ventures are equally popular and rank well ahead of acquisition and internal start-up in terms of frequency of use. Answer: C Page: 243 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 16. Acquisition of an existing business is an attractive strategy option for entering a promising new industry because it A) is an effective way to hurdle entry barriers, is usually quicker than trying to launch a brand-new start-up operation, and allows the acquirer to move directly to the task of building a strong position in the target industry. B) is less expensive than launching a new start-up operation, thus passing the cost-of-entry test. C) is a less risky way of passing the attractiveness test. D) is more likely to result in passing the shareholder value test, the profitability test, and the better-off test. E) offers the prospect of gaining an immediate competitive advantage in the new industry and thus helps ensure that the diversification move will pass the competitive advantage test for building shareholder value. Answer: A Page: 243 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Internal Start-Up
17. Internal start-up of a new business subsidiary can be a more attractive means of entering a desirable new business than is acquiring an existing firm already in the targeted industry when A) the company has ample time and adequate resources to launch the new internal start-up business from the ground up. B) there is a small pool of desirable acquisition candidates. C) the target industry is growing rapidly and no good joint venture partners are available. D) all of the potential acquisition candidates are losing money. E) the target industry is comprised of several relatively large and well-established firms. Answer: A Page: 243 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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18. Which one of the following is not a factor that makes it appealing to diversify into a new industry by forming an internal start-up subsidiary to enter and compete in the target industry? A) When internal entry is cheaper than entry via acquisition. B) When a company possesses the skills and resources to overcome entry barriers and there is ample time to launch the business and compete effectively. C) When adding new production capacity will not adversely impact the supply demand balance in the industry by creating oversupply conditions D) When the industry is growing rapidly and the target industry is comprised of several relatively large and wellestablished firms E) When incumbent firms are likely to be slow or ineffective in combating a new entrants efforts to crack the market Answer: D Page: 243 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 19. Diversifying into a new industry by forming a new internal subsidiary to enter and compete in the target industry is attractive when A) all of the potential acquisition candidates are losing money. B) it is impractical to outsource most of the value chain activities that have to be performed in the target business/industry. C) there is ample time to launch the new business from the ground up and entry barriers can be hurdled at acceptable cost. D) the company has built up a hoard of cash with which to finance a diversification effort. E) none of the companies already in the industry are attractive strategic alliance partners. Answer: C Page: 243 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

Joint Ventures
20. A joint venture is an attractive way for a company to enter a new industry when A) a firm is missing some essential skills or capabilities or resources and needs a partner to supply the missing expertise and competencies or fill the resource gaps. B) it needs access to economies of scope and good financial fits in order to be cost-competitive. C) it is uneconomical for the firm to achieve economies of scope on its own initiative. D) the firm has no prior experience with diversification. E) it has not built up a hoard of cash with which to finance a diversification effort. Answer: A Page: 243 - 244 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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21. A joint venture is an attractive way for a company to enter a new industry when A) the pool of attractive acquisition candidates in the target industry is relatively small. B) it needs better access to economies of scope in order to be cost-competitive. C) the industry is growing slowly and adding too much capacity too soon could create oversupply conditions. D) the firm has no prior experience with diversification and the industry is on the verge of explosive growth. E) the opportunity is too risky or complex for a company to pursue alone, a company lacks some important resources or competencies and needs a partner to supply them, and/or a company needs a local partner in order to enter a desirable business in a foreign country. Answer: E Page: 243 - 244 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

The Case for Diversifying into Related Businesses


22. The essential requirement for different businesses to be "related" is that A) their value chains possess competitively valuable cross-business relationships. B) the products of the different businesses are bought by much the same types of buyers. C) the products of the different businesses are sold in the same types of retail stores. D) the businesses have several key suppliers in common. E) the productions methods that they employ both entail economies of scale. Answer: A Page: 244 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 23. Which of the following is an important appeal of a related diversification strategy? A) Related diversification is an effective way of capturing valuable financial fit benefits. B) Related diversification offers more competitive advantage potential than does unrelated diversification. C) Related diversification offers significant opportunities to strongly differentiate a companys product offerings from those of rivals. D) Related diversification is more likely to pass the cost-of-entry test and the capital gains test than unrelated diversification. E) Related diversification is typically more profitable than unrelated diversification, which is a major factor in helping related diversification pass the attractiveness test. Answer: B Page: 244 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 24. Businesses are said to be "related" when A) they have several key suppliers and several key customers in common. B) their value chains have the same number of primary activities. C) their products are both sold through retailers. D) their value chains possess competitively valuable cross-business relationships that present opportunities to transfer resources from one business to another, combine similar activities and reduce costs, share use of a well-known brand name, and/or create mutually useful resource strengths and capabilities. E) many consumers buy the products/services of both businesses. Answer: D Page: 244 - 245 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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25. Which of the following is not one of the appeals of related diversification? A) It can offer opportunities for transferring expertise, technology, and other capabilities from one business to another. B) It can offer opportunities for reducing costs and for leveraging use of a competitively powerful brand name. C) Related diversification is particularly well-suited for the use of first-mover strategies and capturing valuable financial fits. D) It may present opportunities for cross-business collaboration to create valuable new competencies and capabilities. E) The relatedness among the different businesses provides sharper focus for managing diversification and a useful degree of strategic unity across the companys various business activities. Answer: C Page: 244 - 245 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 26. Strategic fit between two or more businesses exists when one or more activities comprising their respective value chains present opportunities A) to transfer expertise or technology or capabilities from one business to another. B) for cross-business use of a common brand name. C) to lower costs by combining the performance of the related value chain activities of different businesses. D) for cross-business collaboration to build valuable new resource strengths and competitive capabilities. E) All of these. Answer: E Page: 244 - 245 Learning Objective: 2 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 27. One strategic fit-based approach to related diversification would be to A) diversify into new industries that present opportunities to transfer competitively valuable expertise, technological know-how, or other capabilities from one business to another. B) diversify into those industries where the same kinds of driving forces and competitive forces prevail, thus allowing use of much the same competitive strategy in all of the business a company is in. C) acquire rival firms that have broader product lines so as to give the company access to a wider range of buyer groups. D) acquire companies in forward distribution channels (wholesalers and/or retailers). E) expand into foreign markets where the firm currently does no business. Answer: A Page: 244 - 245 Learning Objective: 2 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 28. A company pursuing a related diversification strategy would likely address the issue of what additional industries/businesses to diversify into by A) locating businesses with well-known brand names and large market shares. B) identifying industries with the least competitive intensity. C) identifying an attractive industry whose value chain has good strategic fit with one or more of the firm's present businesses. D) identifying businesses with the potential to diversify the number and types of different activities in the firm's value chain make-up. E) locating new businesses with high degrees of financial fit with its present businesses. Answer: C Page: 246 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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Identifying Cross-Business Strategic Fits Along the Value Chain


29. The best place to look for cross-business strategic fits is A) in R&D and technology activities. B) in supply chain activities. C) in sales and marketing activities. D) in production and distribution activities. E) anywhere along the respective value chains of related businessesno one place is best. Answer: E Page: 246 Learning Objective: 2 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 30. Cross-business strategic fits can be found A) in unrelated as well as related businesses and in the markets of foreign countries as well as in domestic markets. B) only in businesses whose products/services satisfy the same general types of buyer needs and preferences. C) mainly in either technology related activities or sales and marketing activities. D) chiefly in the R&D portions of the value chains of unrelated businesses E) anywhere along the respective value chains of related businesses. Answer: E Page: 246 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 31. Which of the following statements about cross-business strategic fit in a diversified enterprise is not accurate? A) Strategic fit between two businesses exists when the management know-how accumulated in one business is transferable to the other. B) Strategic fit exists when two businesses present opportunities to economize on marketing, selling, and distribution costs. C) Competitively valuable cross-business strategic fits are what enable related diversification to produce a 1 + 1 = 3 performance outcome. D) Strategic fit is primarily a byproduct of unrelated diversification and exists when the value chain activities of unrelated businesses possess economies of scope and good financial fit. E) Strategic fit exists when a company can transfer its brand name reputation to the products of a newly acquired business and add to the competitive power of the new business. Answer: D Page: 244 - 246 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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Strategic Fit, Economies of Scope, and Competitive Advantage


32. What makes related diversification an attractive strategy is A) the ability to broaden the companys product line. B) the opportunity to convert cross-business strategic fits into competitive advantages over business rivals whose operations dont offer comparable strategic fit benefits. C) the potential for improving the stability of the company's financial performance. D) the ability to serve a broader spectrum of buyer needs. E) the added capability it provides in overcoming the barriers to entering foreign markets. Answer: B Page: 249 Learning Objective: 2 Value Creation Difficulty: Medium Taxonomy: Comprehension AACSB:

33. Economies of scope A) are cost reductions that flow from operating in multiple related businesses. B) arise only from strategic fit relationships in the production portions of the value chains of sister businesses. C) are more associated with unrelated diversification than related diversification. D) are present whenever diversification satisfies the attractiveness test and the cost-of-entry test. E) arise mainly from strategic fit relationships in the distribution portions of the value chains of unrelated businesses. Answer: A Page: 250 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 34. Economies of scope A) stem from the cost-saving efficiencies of operating over a wider geographic area. B) have to do with the cost-saving efficiencies of distributing a firm's product through many different distribution channels simultaneously. C) stem from cost-saving strategic fits along the value chains of related businesses. D) refer to the cost-savings that flow from operating across all or most of an industry's value chain activities. E) arise from the cost-saving efficiencies of having a wide product line and offering customers a big selection of models and styles to choose from. Answer: C Page: 250 Learning Objective: 2 Value Creation Difficulty: Medium Taxonomy: Comprehension AACSB:

35. Which of the following best illustrates an economy of scope? A) Being able to eliminate or reduce costs by combining related value-chain activities of different businesses into a single operation B) Being able to eliminate or reduce costs by performing all of the value chain activities of related sister businesses at the same location C) Being able to eliminate or reduce costs by extending the firm's scope of operations over a wider geographic area D) Being able to eliminate or reduce costs by expanding the size of a company's manufacturing plants E) Being able to eliminate or reduce costs by having more value chain activities performed in-house rather than outsourcing them Answer: A Page: 250 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation TB811

36. A big advantage of related diversification is that A) it offers ways for a firm to realize 1 + 1 = 3 benefits because the value chains of the different businesses present competitively valuable cross-business relationships. B) it is less capital intensive and usually more profitable than unrelated diversification. C) it involves diversifying into industries having the same kinds of key success factors. D) it is less risky than either vertical integration or unrelated diversification due to lower capital requirements. E) it passes the industry attractiveness test and thus offers the best route to 2 + 2 = 4 benefits. Answer: A Page: 250 Learning Objective: 2 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 37. A diversified company that leverages the strategic fits of its related businesses into competitive advantage A) has a distinctive competence in its related businesses. B) has a clear path to achieving 1 + 1 = 3 gains in shareholder value. C) has a clear path to global market leadership in the industries where it has related businesses. D) passes the value chain test and the profit expectations test for building shareholder value. E) achieves economies of scope and passes the reduced-costs test for crafting a diversification strategy capable of creating added shareholder value. Answer: B Page: 250 Learning Objective: 2 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

The Case for Diversifying into Unrelated Businesses


38. A strategy of diversifying into unrelated businesses A) is aimed at achieving good financial fit (whereas related diversification aims at good strategic fit). B) is the best way for a company to pass the attractiveness test in choosing which types of businesses/industries to enter. C) discounts the importance of strategic fit benefits and instead focuses on building and managing a group of businesses capable of delivering good financial performance irrespective of the industries these businesses are in. D) concentrates on diversifying into businesses where a company can leverage use of a well-known brand name in ways that create added value for shareholders. E) generally offers more competitive advantage potential than related diversification. Answer: C Page: 250 Learning Objective: 3 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 39. The basic premise of unrelated diversification is that A) the least risky way to diversify is to seek out businesses that are leaders in their respective industry. B) the best companies to acquire are those that offer the greatest economies of scope rather than the greatest economies of scale. C) the best way to build shareholder value is to acquire businesses with strong cross-business financial fit. D) any company that can be acquired on good financial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity. E) the task of building shareholder value is better served by seeking to stabilize earnings across the entire business cycle than by seeking to capture cross-business strategic fits. Answer: D Page: 251 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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40. In diversified companies with unrelated businesses, the strategic attention of top executives tends to be focused on A) screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses. B) identifying acquisition candidates that can pass the better-off test. C) identifying opportunities to achieve greater economies of scope. D) identifying opportunities to acquire businesses that can benefit from using the parent companys potent brand name. E) identifying acquisition candidates that can pass the capital gains test Answer: A Page: 251 Learning Objective: 3 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 41. Which of the following is not likely to command much strategic attention from the top executives of companies pursuing an unrelated diversification strategy? A) Acquiring new businesses with attractive profit prospects B) Whether existing businesses should be retained or divested based on their ability to meet corporate targets for profit and returns on investment C) Looking for new businesses that present good opportunities for achieving economies of scope D) Identifying acquisition candidates that are financially distressed, can be acquired at a bargain price, and whose operations can, in managements opinion, be turned around with the aid of the parent companys financial resources and managerial know-how E) Identifying opportunities to acquire new businesses in industries with bright growth prospects Answer: C Page: 251 - 252 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 42. A key issue in companies pursuing an unrelated diversification strategy is A) how wide a net to cast in building a portfolio of unrelated businesses. B) whether to keep or divest businesses whose technological approaches do not match the overall technology and R&D strategy of the corporation. C) how quickly to divest businesses whose competitive strategies do not closely match the competitive strategies of sister businesses. D) whether to build shareholder value via paying higher dividends or via actions aimed at increasing the companys stock price. E) whether to acquire new businesses that offer potential for achieving greater economies of scope or businesses that offer potential for achieving greater economies of scale. Answer: A Page: 252 Learning Objective: 3 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 43. With an unrelated diversification strategy, the types of companies that make particularly attractive acquisition targets are A) struggling companies with good turnaround potential, undervalued companies that can be acquired at a bargain price, and companies that have bright growth prospects but are short on investment capital. B) companies offering the biggest potential to reduce labor costs. C) cash cow businesses with excellent financial fit. D) companies that are market leaders in their respective industries. E) companies that are employing the same basic type of competitive strategy as the parent corporations existing businesses. Answer: A Page: 252 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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The Merits of an Unrelated Diversification Strategy


44. The success of unrelated diversification is dependent upon managements ability to A) acquire new businesses that utilize much the same technology as existing businesses. B) divest businesses whose competitive strategies do not match the overall competitive strategy of the corporation. C) acquire new businesses having attractive distribution-related and customer-related strategic fits with existing businesses. D) spotting bargain-priced companies with big upside potential and then turning around their operations quickly with the aid of the parent companys financial resources and managerial know-how. E) identify potential new acquisition candidates that are cash cows (as opposed to cash hogs). Answer: D Page: 252 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 45. One appealing aspect of unrelated diversification is that it A) expands a firm's competitive advantage opportunities to include a wider array of businesses. B) spreads the business risk across a group of truly diverse industries. C) increases strategic fit opportunities and the potential for a 1 + 1 =3 outcome on the bottom line. D) results in having more cash cow businesses than cash hog businesses. E) facilitates capturing the financial fits among sister businesses (as compared to a strategy of related diversification). Answer: B Page: 252 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 46. Which of the following is not one of the appeals of an unrelated diversification strategy? A) The ability to spread business risk over truly diverse industries (as compared to related diversification which is limited to spreading risk only among businesses with strategic fit) B) An ability to employ the companys financial resources to maximum advantage by investing in whatever industries/businesses offer the best profit prospects C) Superior top management ability to cope with the wide variety of problems encountered in managing a broadly diversified group of businesses D) A potential for achieving somewhat more stable corporate sales and profits over the course of economic upswings and downswings (to the extent the company diversifies into businesses whose ups and downs tend to occur at different times) E) The potential to grow shareholder value by investing in bargain-priced or struggling companies with big upside profit potential, turning their operations around fairly quickly with infusions of cash and managerial know-how, and then riding the crest of higher profitability Answer: C Page: 252 - 253 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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The Drawbacks of Unrelated Diversification


47. The two biggest drawbacks or disadvantages of unrelated diversification are A) the difficulties of passing the cost-of-entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense. B) the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business. C) demanding managerial requirements and limited competitive advantage potential that cross-business strategic fit provides. D) Ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into. E) the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the companys different businesses. Answer: C Page: 254 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 48. The two biggest drawbacks or disadvantages of unrelated diversification are A) underemphasizing the importance of resource fit and the strong likelihood of diversifying into businesses that top management does not know all that much about. B) insufficient cash flows to finance so many different lines of business and a lack of uniformity among the strategies of the businesses it has diversified into. C) volatile sales and profits and making the mistake of diversifying into too many cash cow businesses. D) the difficulties of competently managing many different businesses and being without the added source of competitive advantage that cross-business strategic fit provides. E) over-investing in the achievement of economies of scope and the difficulties of achieving a good mix of cash cow and cash hog businesses. Answer: D Page: 255 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 49. Which of the following is not among the disadvantages and managerial problems encountered by companies pursuing unrelated diversification strategies? A) Knowing so little about the industries in which each business competes, that management is unable to properly evaluate strategic proposals put forth by business-unit managers B) Being too unfamiliar with the issues and problems facing each subsidiary to effectively pick business-unit heads having the requisite combination of managerial skills and know-how C) The strain it places on corporate-level management in trying to stay on top of fresh industry developments and the strategic progress and plans of each business subsidiary D) Ending up with too many cash hog businesses (as compared to related diversification strategies where cash hog businesses are rare) E) The potential that corporate management will not know how to bail a business subsidiary that runs into deep troublebecause the company has diversified into businesses that corporate management has little experience or expertise in running Answer: D Page: 255 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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50. In companies pursuing a strategy of unrelated diversification, A) the main basis for competitive advantage and improved shareholder value is increased ability to achieve economies of scope. B) each business is on its own in trying to build a competitive edge and the consolidated performance of the businesses is likely to be no better than the sum of what the individual businesses could achieve if they were independent. C) there is a strong chance that the combined competitive advantages of the various businesses will produce a 1 + 1 = 3 performance outcome as opposed to just a 1 + 1 = 2 performance outcome. D) the main basis for improved shareholder value is strong cross-business financial fits. E) the main basis for improved shareholder value is increased ability to achieve economies of scale in the businesses it has entered. Answer: B Page: 256 Learning Objective: 3 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation

Evaluating the Strategy of a Diversified Company


51. To identify a diversified companys strategy, one should consider such factors as A) the extent to which the firm is broadly or narrowly diversified, whether it is pursuing related or unrelated diversification (or a mixture of both), and the recent moves it has made to divest businesses, acquire new businesses, and strengthen the positions of existing businesses. B) whether the company is focusing on milking its cash cows or feeding its cash hogs. C) the technological proficiencies, labor skill requirements, and functional area strategies characterizing each of the firm's businesses. D) each business's competitive approachwhether it is pursuing a low-cost leadership, differentiation, best-cost, focused differentiation, or focused low-cost strategy. E) whether it is emphasizing the pursuit of economies of scale or economies of scope. Answer: A Page: 257 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 52. When identifying a diversified company's present corporate strategy, which of the following would not be something to look for? A) Recent moves to build positions in new industries B) The companys approach to allocating investment capital and resources across its present businesses C) Recent management actions to strengthen the companys positions in existing businesses D) Recent moves to divest weak or unattractive business units E) Actions over the past few years to substitute global strategies for multi-country strategies in one or more business units Answer: E Page: 257 Learning Objective: 1 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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53. The procedure for evaluating the pluses and minuses of a diversified company's strategy includes A) assessing the attractiveness of the industries the company has diversified into. B) assessing the competitive strength of each business the company has diversified into to see which ones are the strongest/weakest contenders in their respective industries. C) ranking the performance prospects of the various businesses from best to worst and determining the priorities for resource allocation. D) checking the competitive advantage potential of cross-business strategic fits and also checking whether the firms resources fit the needs of its present business lineup. E) All of the above. Answer: E Page: 257 - 258 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 54. Which of the following is not a major consideration in evaluating the pluses and minuses of a diversified company's strategy? A) Checking whether the companys resources fit the requirements of its present business lineup B) Scrutinizing each industry/business to determine where driving forces are strongest/weakest and how many profitable strategic groups the company has diversified into C) Ranking the performance prospects of the various businesses from best to worst and determining what the corporate parents priorities should be in allocating resources to its different businesses D) Checking the competitive advantage potential of cross-business strategic fits E) Assessing the competitive strength of each business the company has diversified into and determining which ones are strong/weak contenders in their respective industries Answer: B Page: 257 - 258 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 55. A comprehensive evaluation of the group of businesses a company has diversified into involves A) evaluating the attractiveness of industries the company has diversified into and the competitive strength of each of its business units. B) evaluating the strategic fits and resource fits among the various sister businesses. C) ranking the performance prospects of the businesses from best to worst and determining what the corporate parents priorities should be in allocating resources to its various businesses. D) using the results of the prior analytical steps as a basis for crafting new strategic moves to improve the companys overall performance. E) All of the above. Answer: E Page: 257 - 258 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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56. Evaluating a diversified company's corporate strategy and critiquing the pluses and minuses of its business lineup involves A) a SWOT analysis of each industry in which the firm has a business interest. B) applying the cost-of-entry test, the better-off test, the profitability test, and the shareholder value test to each business and industry represented in the company's business portfolio. C) evaluating the strategic fits and resource fits among the various sister businesses and deciding what priority to give each of the company's business units in allocating resources. D) looking at each industry/business to determine how many profitable strategic groups that the company has diversified into. E) determining how many of the business units are following focus strategies, differentiation strategies, best-cost provider strategies, and low-cost leadership strategies. Answer: C Page: 257 - 258 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 57. Which one of the following is not an important aspect of evaluating the merits of a diversified companys strategy? A) Assessing the competitive strength of each business the company has diversified into B) Determining which business units are cash cows and which ones are cash hogs and then evaluating how soon the company's cash hogs can be transformed into cash cows C) Evaluating the strategic fits and resource fits among the various sister businesses D) Assessing the attractiveness of the industries the company has diversified into, both individually and as a group E) Ranking the performance prospects of the businesses from best to worst and deciding what priority to give each of the company's business units in allocating resources Answer: B Page: 257 - 258 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Step 1: Evaluating Industry Attractiveness


58. In judging the attractiveness of the businesses a multi-business company has diversified into, it is important to A) consider whether each industry the company has diversified into represents a good business for the company to be in. B) calculate industry attractiveness scores for each industry into which the company has diversified. C) consider the appeal of the whole group of industries in which the company has invested. D) consider to what extent the industries a company has invested in hold promise for attractive growth and profitability. E) All of the above Answer: E Page: 258 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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59. As a rule, all the industries represented in a diversified company's business portfolio should be judged on such attractiveness factors as A) market size and projected growth rate. B) emerging opportunities and threats, the intensity of competition, and the degree of industry uncertainty and business risk. C) resource requirements and the presence of cross-industry strategic fits. D) seasonal and cyclical factors, industry profitability, and whether an industry has significant social, political, regulatory, and environmental problems. E) All of these. Answer: E Page: 258 - 259 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 60. Which of the following is not generally something that ought to be considered in evaluating the attractiveness of a diversified company's business makeup? A) Market size and projected growth rate, industry profitability, and the intensity of competition B) Industry uncertainty and business risk C) The frequency with which strategic alliances and collaborative partnerships are used in each industry, the extent to which firms in the industry utilize outsourcing, and whether the industries a company has diversified into have common key success factors D) Seasonal and cyclical factors, resource requirements, and whether an industry has significant social, political, regulatory, and environmental problems E) The presence of cross-industry strategic fits Answer: C Page: 258 - 259 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 61. Assessments of the long-term attractiveness of each industry represented in a diversified company's lineup of businesses should be based on A) a complete value-chain analysis of each industry. B) whether the industries have the same kinds of driving forces. C) how many companies in each industry are making money and how many are losing money. D) quantitative industry attractiveness scores derived from rating each industry on several relevant attractiveness measures (weighted according to their relative importance in determining overall attractiveness). E) the competitive advantage potential offered by each industry's key success factors. Answer: D Page: 259 - 260 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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62. Calculating quantitative attractiveness ratings for the industries a company has diversified into involves A) determining each industry's key success factors, calculating the ability of the company to be successful on each industry KSF, and obtaining overall measures of the firm's ability to compete successfully in each of its industries based on the combined KSF ratings. B) determining each industry's competitive advantage factors, calculating the ability of the company to be successful on each competitive advantage factor, and obtaining overall measures of the firm's ability to achieve sustainable competitive advantage in each of its industries based on the combined competitive advantage factor ratings. C) selecting a set of industry attractiveness measures, weighting the importance of each measure, rating each industry on each attractiveness measure, multiplying the industry ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each industry to obtain an overall industry attractiveness score, and using the overall industry attractiveness scores to evaluate the attractiveness of all the industries, both individually and as a group. D) rating the attractiveness of each industrys strategic and resource fits, summing the attractiveness scores, and determining whether the overall scores for the industries as a group are appealing or not. E) identifying each industry's average profitability, rating the difficulty of achieving average profitability in each industry, and deciding whether the companys prospects for above-average profitability are attractive or unattractive, industry-by-industry. Answer: C Page: 259 - 260 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 63. The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to A) determine which industry is the biggest and fastest growing. B) get in position to rank the industries from most competitive to least competitive. C) provide a basis for drawing analysis-based conclusions about the attractiveness of the industries a company has diversified into, both individually and as a group, and further to provide an indication of which industries offer the best and worst long-term prospects. D) ascertain which industries have the easiest-to-achieve key success factors. E) rank the attractiveness of the various industry value chains from best to worst. Answer: C Page: 258 - 259 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 64. A weighted industry attractiveness assessment is generally analytically superior to an unweighted assessment because A) a weighted ranking identifies which industries offer the best/worst long-term profit prospects. B) an unweighted ranking doesn't discriminate between strong and weak industry driving forces and industry competitive forces. C) it does a more accurate job of singling out which industry key success factors are the most important. D) an unweighted ranking doesn't help identify which industries have the easiest and hardest value chains to execute. E) the various measures of attractiveness are not likely to be equally important in determining overall attractiveness. Answer: E Page: 259 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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65. When industry attractiveness ratings are calculated for each of the industries a multi-business company has diversified into, the results help indicate A) which industries appear to be the best and worst ones to be in and the attractiveness of all the industries as a group from the standpoint of the companys long-term performance. B) which industries have attractive key success factors and which industries have unattractive key success factors. C) which industries have the biggest economies of scale and which industries have the greatest economies of scope and the overall potential for cost reduction in the industries as a group. D) which industries are most attractive from the standpoint of long-term growth and the growth prospects of all the industries as a group. E) which industries are most attractive from the standpoint of industry driving forces and competitive forces. Answer: A Page: 260 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 66. Calculating quantitative attractiveness ratings for the industries a diversified company has invested in A) allows a company to rank the competitive advantage opportunities in each industry from best to worst. B) helps identify which industries have the best/worst prospects for revenue growth. C) identifies which industry has the best/worst value chain from the standpoint of cost reduction potential. D) provides a basis for deciding whether a diversified company has good prospects for growth and profitability, given the attractiveness ratings of the industries in which it has business interests. E) helps identify which industry is likely to be the largest/smallest contributor to the companys growth and profitability. Answer: D Page: 260 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Step 2: Evaluating Business-Unit Competitive Strength


67. The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to A) rank the business unit from best to worst in terms of potential for cost reduction and profit margin improvement. B) determine how strongly positioned each business unit is in its industry. C) determine which business unit has the greatest number of resource strengths, competencies, and competitive capabilities and which one has the least. D) determine which one has the biggest market share and is growing the fastest. E) rank each business units strategy from best to worst. Answer: B Page: 261 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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68. Assessments of how a diversified company's subsidiaries compare in competitive strength should be based on such factors as A) vulnerability to seasonal and cyclical downturns, vulnerability to driving forces, and vulnerability to fluctuating interest rates and exchange rates. B) relative market share, ability to match or beat rivals on key product attributes, brand image and reputation, costs relative to competitors, and ability to benefit from strategic fits with sister businesses. C) the appeal of its strategy, relative number of competitive capabilities, the number of products in each businesses product line, which businesses have the highest/lowest market shares, and which businesses earn the highest/lowest profits before taxes. D) the ability to hurdle barriers to entry, value chain attractiveness, and business risk. E) cost reduction potential, customer satisfaction potential, and comparisons of annual cash flows from operations. Answer: B Page: 261 - 262 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 69. Relative market share is A) calculated by dividing a business's percentage share of total industry sales volume by the percentage share held by its largest rivalit is a better indicator of a business's competitive strength than is a simple percentage measure of market share. B) calculated by adjusting a companys dollar market share up or down in proportion to whether the companys quality and customer service are above/below industry averages. C) calculated by dividing a companys market share (based on dollar volume) by the industry-average market share. D) particularly useful in identifying cash cows and cash hogs cash cow businesses have big relative market shares (above 1.0) and cash hog businesses have low relative market shares (below 0.5). E) calculated by subtracting the industry-average market share (based on dollar volume) from a companys market share to determine how much a companys market share is above/below the industry averagethis amount is a better indicator of a business's competitive strength than is just looking at the firms market share percentage. Answer: A Page: 261 Learning Objective: 4 Difficulty: Hard Taxonomy: Knowledge AACSB: Value Creation 70. Calculating quantitative competitive strength ratings for each of a diversified companys business units involves A) determining each industry's key success factors, rating the ability of each business to be successful on each industry KSF, and adding the individual ratings to obtain overall measures of each business's ability to compete successfully. B) identifying the competitive forces facing each business, rating the strength of these competitive forces industry-by-industry, and then ranking each businesss ability to be profitable, given the strength of the competition it faces. C) selecting a set of competitive strength measures, weighting the importance of each measure, rating each business on each strength measure, multiplying the strength ratings by the assigned weight to obtain a weighted rating, adding the weighted ratings for each business unit to obtain an overall competitive strength score, and using the overall competitive strength scores to evaluate the competitive strength of all the businesses, both individually and as a group. D) determining which businesses possess good strategic fit with other businesses, identifying the portion of the value chain where this fit occurs, and evaluating the strength of the competitive advantage attached to each of the strategic fits to get an overall measure of competitive advantage potentialbusinesses with the highest/lowest competitive advantage potential have the most/least competitive strength.

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E) rating the caliber of each businesses strategic and resource fits, weighting the importance of each type of strategic/resource fit, calculating weighted strategic/resource fit scores, and adding the weighted ratings for each business to obtain an overall strength score for each business unit that indicates whether the company has adequate strategic/resource fits to be a strong market contender in each of the industries where it competes. Answer: C Page: 262 - 263 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 71. The value of determining the relative competitive strength of each business a company has diversified into is A) to have a quantitative basis for identifying which businesses have large/small competitive advantages or competitive disadvantages vis--vis the rivals in their respective industries. B) to have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parents revenue growth. C) to compare resource strengths and weaknesses, business by business. D) to have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries. E) to have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parents profitability. Answer: D Page: 263 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Using a Nine Cell Matrix to Simultaneously Display Industry Attractiveness and Competitive Strength
72. The nine-cell industry attractiveness-competitive strength matrix A) is useful for helping decide which businesses should have high, average, and low priorities in allocating corporate resources. B) indicates which businesses are cash hogs and which are cash cows. C) pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix but is less clear about the best strategies for businesses positioned in the bottom six cells. D) identifies which sister businesses have the greatest strategic fit. E) identifies which sister businesses have the greatest resource fit. Answer: A Page: 264 - 265 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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73. The most important strategy-making guidance that comes from drawing a 9-cell industry attractivenesscompetitive strength matrix is A) which businesses in the portfolio have the most potential for strategic fit and resource fit. B) why cash cow businesses are more valuable than cash hog businesses. C) that corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture. D) which businesses have the biggest competitive advantages and which ones confront serious competitive disadvantages. E) which businesses are in industries with profitable value chains and which are in industries with money-losing value chains. Answer: C Page: 265 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 74. One of the most significant contributions to strategy-making in diversified companies that the 9-cell industry attractiveness/competitive strength matrix provides is A) identifying which businesses have strategies that should be continued, which business have strategies that need fine-tuning, and which businesses have strategies that need major overhaul. B) that businesses having the greatest competitive strength and positioned in the most attractive industries should have the highest priority for corporate resource allocation and that competitively weak businesses in relatively unattractive industries should have the lowest priority and perhaps even be considered for divestiture. C) pinpointing what strategies are most appropriate for businesses positioned in the four corners of the matrix (although the matrix reveals little about the best strategies for businesses positioned in the remainder of the matrix). D) its ability to pinpoint what kind of competitive advantage or disadvantage each business has. E) pinpointing which businesses to keep and which ones to divest. Answer: B Page: 265 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Step 3: Checking the Competitive Advantage Potential of Cross-Business Strategic Fits


75. In a diversified company, a business subsidiary has more competitive advantage potential when A) it is a cash cow. B) it has value chain relationships with other business subsidiaries that present competitively valuable opportunities to transfer skills or technology or intellectual capital from one business to another, combine the performance of related activities and reduce costs, share use of a well-respected brand name, or collaborate to create new competitive capabilities. C) it is the company's biggest profit producer or is capable of becoming the biggest. D) it is in a fast-growing industry. E) it operates in an industry where competition is less intense and driving forces are relatively weak. Answer: B Page: 266 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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76. Checking the competitive advantage potential of cross-business strategic fits in a diversified company involves evaluating the extent to which sister businesses present A) opportunities to combine the performance of certain cross-business activities and thereby reduce costs. B) opportunities to transfer skills, technology, or intellectual capital from one business to another. C) opportunities for the companys different businesses to share use of a well-respected brand name. D) opportunities for sister businesses to collaborate in creating valuable new competitive capabilities. E) All of these. Answer: E Page: 266 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 77. Checking a diversified company's business portfolio for the competitive advantage potential of cross-business strategic fits does not involve ascertaining A) the extent to which sister business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs. B) the extent to which sister business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another. C) the extent to which sister business units have opportunities to share use of a well-respected brand name. D) the extent to which sister business units have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources. E) which business units are cash cows and which ones are cash hogs. Answer: E Page: 266 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 78. Checking a diversified firm's business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of A) whether the parents companys competitive advantages are being deployed to maximum advantage in each of its business units. B) whether the competitive strategies employed in each business act to reinforce the competitive power of the strategies employed in the companys other businesses. C) whether the competitive strategies in each business possess good strategic fit with the parent companys corporate strategy. D) the extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, create competitively valuable new capabilities via cross-business collaboration, or transfer skills or technology or intellectual capital from one business to another. E) how compatible the competitive strategies of the various sister businesses are and whether these strategies are properly aimed at achieving the same kind of competitive advantage. Answer: D Page: 266 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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79. Which of the following is not a part of checking a diversified company's business units for cross-business competitive advantage potential? A) Ascertaining the extent to which sister business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs B) Ascertaining the extent to which sister business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another C) Ascertaining the extent to which sister business units are making maximum use of the parent companys competitive advantages D) Ascertaining the extent to which sister business units have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources E) Ascertaining the extent to which sister business units present opportunities to share use of a well-respected brand name Answer: C Page: 266 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Step 4: Checking for Resource Fit


80. A diversified company's business units exhibit good resource fit when A) each business is a cash cow. B) a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin and when individual businesses add to a companys overall strengths. C) each business is sufficiently profitable to generate an attractive return on invested capital. D) each business unit produces large internal cash flows over and above what is needed to build and maintain the business. E) the resource requirements of each business exactly match the companys available resources. Answer: B Page: 266 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 81. The businesses in a diversified company's lineup exhibit good resource fit when A) the resource requirements of each business exactly match the resources the company has available. B) individual businesses add to a company's resource strengths and when a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin. C) each business is generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent. D) each business unit produces sufficient cash flows over and above what is needed to build and maintain the business, thereby providing the parent company with enough cash to pay shareholders a generous and steadily increasing dividend. E) there are enough cash cow businesses to support the capital requirements of the cash hog businesses. Answer: B Page: 266 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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82. A cash cow type of business A) generates unusually high profits and returns on equity investment. B) is so profitable that it has no long-term debt. C) generates positive cash flows over and above its internal requirements, thus providing a corporate parent with cash flows that can be used for financing new acquisitions, investing in cash hog businesses, and/or paying dividends. D) is a business with such a strong competitive advantage that it generates big profits, big returns on investment, and big cash surpluses after dividends are paid. E) has good strategic fit with a cash hog business. Answer: C Page: 267 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 83. The tests of whether a diversified companys businesses exhibit resource fit do not include A) whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses. B) whether a business adequately contributes to achieving the corporate parents performance targets. C) whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating. D) whether the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money. E) whether the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into. Answer: D Page: 268 - 269 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 84. Which one of the following is not part of the task of checking a diversified company's business line-up for adequate resource fit? A) Determining whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses B) Determining whether recently acquired businesses are acting to strengthen a companys resource base and competitive capabilities or whether they are causing its competitive and managerial resources to be stretched too thinly across its businesses C) Determining whether some business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another D) Determining whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating E) Determining whether the corporate parent has or can develop sufficient resource strengths and competitive capabilities to be successful in each of the businesses it has diversified into Answer: C Page: 266 - 269 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation

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Step 5: Ranking the Performance Prospects of Business Units and Assigning a Priority for Resource Allocation
85. Which one of the following is the best guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company? A) Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority. B) Business subsidiaries with the brightest profit and growth prospects and solid strategic and resource fits generally should head the list for corporate resource support. C) The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation. D) Businesses with the most strategic and resource fits should be given top priority and those with the fewest strategic and resource fits should be given low priority. E) Businesses with high competitive strength ratings should be given top priority and those with low competitive strength ratings should be given low priority Answer: B Page: 270 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 86. The options for allocating a diversified company's financial resources include A) making acquisitions to establish positions in new businesses or to complement existing businesses. B) investing in ways to strengthen or grow existing businesses. C) funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses. D) paying off existing debt, increasing dividends, building cash reserves, or repurchasing shares of the company's stock. E) All of these. Answer: E Page: 271 Learning Objective: 4 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 87. Which one of the following is not a reasonable option for deploying a diversified company's financial resources? A) Making acquisitions to establish positions in new businesses or to complement existing businesses B) Concentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows C) Funding long-range R&D ventures aimed at opening market opportunities in new or existing businesses D) Paying down existing debt, increasing dividends, or repurchasing shares of the company's stock E) Investing in ways to strengthen or grow existing businesses Answer: B Page: 271 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance


88. Corporate strategy options for diversified companies include A) broadening the companys business scope by making new acquisitions in new industries. B) divesting weak-performing businesses and retrenching to a narrower base of business operations. C) restructuring the companys business lineup with a combination of divestitures and new acquisitions to put a whole new face on the companys business makeup. D) pursuing growth opportunities within the existing business lineup. E) All of these. Answer: E Page: 271 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 89. The strategic options to improve a diversified companys overall performance do not include which of the following categories of actions? A) Broadening the companys business scope by making new acquisitions in new industries B) Increasing dividend payments to shareholders and/or repurchasing shares of the company's stock C) Restructuring the companys business lineup with a combination of divestitures and acquisitions to put a whole new face on the companys business makeup D) Pursuing multinational diversification and striving to globalize the operations of several of the companys business units E) Divesting weak-performing businesses and retrenching to a narrower base of business operations Answer: B Page: 271 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 90. Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue? A) Pursue multinational diversification B) Restructure the companys business lineup with a combination of divestitures and new acquisitions C) Craft new initiatives to build/enhance the reputation of the companys brand name D) Divest some businesses and retrench to a narrower diversification base E) Broaden the diversification base Answer: C Page: 273 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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Broadening a Diversified Company's Business Base


91. A company that is already diversified may choose to broaden its business base by building positions in new related or unrelated businesses because A) it has resources or capabilities that are eminently transferable to other related or complementary businesses. B) the company's growth is sluggish and it needs the sales and profit boost that a new business can provide. C) management wants to lessen the companys vulnerability to seasonal or recessionary influences or to threats from emerging new technologies. D) it wants to make new acquisitions to strengthen or complement some of its present businesses. E) All of these. Answer: E Page: 272 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

Divesting Some Businesses and Retrenching to a Narrower Diversification Base


92. Retrenching to a narrower diversification base A) is usually the most attractive long-run strategy for a broadly diversified company confronted with recession, high interest rates, mounting competitive pressures in several of its businesses, and sluggish growth. B) has the advantage of focusing a diversified firm's energies on building strong positions in a few core businesses rather the stretching its resources and managerial attention too thinly across many businesses. C) is an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit. D) is sometimes an attractive option for deepening a diversified company's technological expertise and supporting a faster rate of product innovation. E) is a strategy best reserved for companies in poor financial shape. Answer: B Page: 274 Learning Objective: 5 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 93. Retrenching to a narrower diversification base can be attractive or advisable when A) certain businesses have questionable long-term potential. B) a diversified company has businesses that have little or no strategic or resource fits with the "core" businesses that management wishes to concentrate on. C) certain business units are weakly positioned and show poor prospects for providing a good return on investment. D) market conditions in a once-attractive business have badly deteriorated. E) All of these. Answer: E Page: 274 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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94. In which of the following instances is retrenching to a narrower diversification base not likely to be an attractive or advisable strategy for a diversified company? A) When a diversified company has struggled to make certain businesses attractively profitable B) When a diversified company has too many cash cows C) When one or more businesses are cash hogs with questionable long-term potential D) When businesses in once-attractive industries have badly deteriorated E) When a diversified company has businesses that have little or no strategic or resource fits with the "core" businesses that management wishes to concentrate on Answer: B Page: 274 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 95. Divestiture can be accomplished by A) selling a business outright. B) spinning the unwanted business off as a managerially and financially independent company by selling shares to the investing public via an initial public offering of stock. C) spinning the unwanted business off as a managerially and financially independent company by distributing shares in the new company to existing shareholders of the parent company. D) All of the above. E) None of the abovethe best and quickest ways to divest a business are either to close it down or else just walk away and give the keys to creditors. Answer: D Page: 275 - 276 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Restructuring a Companys Business Lineup Through a Mix of Divestures and New Acquisitions
96. Strategies to restructure a diversified companys business lineup involves A) revamping the value chains of each of a diversified company's businesses. B) focusing on restoring the profitability of its money-losing businesses and thereby improving the company's overall profitability. C) revamping the strategies of its different businesses, especially those that are performing poorly. D) divesting some businesses and acquiring new ones so as to put a new face on a diversified company's business makeup. E) broadening the scope of diversification to include a larger number of smaller and more diverse businesses. Answer: D Page: 276 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 97. Corporate restructuring strategies A) involve making radical changes in a diversified company's business lineup, divesting some businesses and acquiring new ones so as to put a new face on the companys business lineup. B) entails reducing the scope of diversification to a smaller number of businesses. C) entail selling off marginal businesses to free up resources for redeployment to the remaining businesses. D) focus on crafting initiatives to restore a diversified company's money-losing businesses to profitability. E) focus on broadening the scope of diversification to include a larger number of businesses and boost the company's growth and profitability. Answer: A Page: 276 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation TB831

98. Conditions that may make corporate restructuring strategies appealing include A) ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. B) a business lineup that consists of too many slow-growth, declining, low-margin, or competitively weak businesses. C) an excessive debt burden with interest costs that ead deeply into profitability. D) ill-chosen acquisitions that havent lived up to expectations. E) All of these. Answer: E Page: 276 - 277 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

Pursuing Multinational Diversification


99. What sets a multinational diversification strategy apart from other diversification strategies is A) the presence of extra degrees of strategic fit and more economies of scope. B) the potential to have a higher degree of technological expertise. C) a diversity of businesses and a diversity of national markets. D) the potential for faster growth, higher rates of profitability, and more profit sanctuaries. E) greater diversity in the types of value chain activities in its different businesses. Answer: C Page: 278 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 100. A multinational diversification strategy allows a firm to pursue maximum competitive advantage potential by A) fully capturing economies of scale and learning/experience curve effects and also pursuing cross-business economy of scope opportunities. B) exploiting opportunities for both cross-business and cross-country collaboration and strategic coordination. C) leveraging use of a well-known and competitively powerful brand name. D) transferring competitively valuable resources both from one business to another and one country to another. E) All of these. Answer: E Page: 279 - 281 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 101. The sources of a competitive advantage for a diversified multinational corporation do not include A) transferring competitively valuable resources from one business to another and one country to another. B) the ability to exploit opportunities for both cross-business and cross-country collaboration and strategic coordination. C) leveraging use of a well-known and competitively powerful brand name. D) pursuing cross-business economy of scope opportunities and striving to fully capture scale economies. E) trying to maximize the number of cash cow businesses and minimize the number of cash hog businesses. Answer: E Page: 279 - 281 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation

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102. Which one of the following is not a way for a company to build competitive advantage by pursuing a multinational diversification strategy? A) Fully capturing economies of scale and experience curve effects as well as cross-business economies of scope B) Using cross-business and cross-country coordination of certain value chain activities to outcompete rivals C) Expansion of a companys business model to include revenues from exporting, franchising, and licensing D) Transferring competitively valuable resources from one business to another and one country to another E) Leveraging use of a well-known and competitively powerful brand name across two or more of its businesses Answer: C Page: 279 - 281 Learning Objective: 5 Difficulty: Easy Taxonomy: Comprehension AACSB: Value Creation 103. A diversified company may pursue expansion of several of its businesses into the markets of additional foreign countries in order to A) fully capture economies of scale and learning/experience curve effects in these businesses. B) exploit opportunities for both cross-business and cross-country coordination of value chain activities and strategic initiatives. C) leverage use of a well-known and competitively powerful brand name across two or more of its businesses. D) transfer competitively valuable resources in these businesses from one country to another. E) All of these. Answer: E Page: 279 - 281 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

Short Answer Questions


104. Briefly discuss when it makes good strategic sense for a company to consider diversification. Page: 241 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 105. Identify and briefly discuss each of the three tests for determining whether diversification into a new business is likely to build shareholder value. Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation 106. The attractiveness test is the most important test for determining whether diversification into a new business is likely to result in 1 + 1 = 3 increases in shareholder value (as opposed to simply a 1 + 1 = 2 type of increase). True or false? Justify and explain your answer. Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 107. Explain the relevance of the following as they relate to building shareholder value via diversification: a.) the attractiveness test. b.) the cost-of-entry test. c.) the better-off test. Page: 242 Learning Objective: 1 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation

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108. Identify and explain the meaning and strategic significance of each of the following terms: a.) the attractiveness test (as it relates to a potential diversification move) b.) the better-off test (as it relates to a potential diversification move) c.) related diversification d.) unrelated diversification e.) strategic fit f.) economies of scope g.) divestiture h.) corporate restructuring Page: 242; 244; 245; 250; 275; 276 Learning Objective: 1, 2, 3, 5 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation 109. Identify and briefly discuss each of the three options for entering new businesses. Which one is the most popular in the sense of being used most frequently? Page: 243 - 244 Learning Objective: 1 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation 110. Carefully explain the difference between a strategy of related diversification and a strategy of unrelated diversification. Page: 244 Learning Objective: 2, 3 Difficulty: Easy Taxonomy: Knowledge AACSB: Value Creation 111. Which is the better approach to diversificationa strategy of related diversification or a strategy of unrelated diversification? Explain and support your answer. Page: 244 - 256 Learning Objective: 2, 3 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 112. What is meant by the term strategic fit? What are the advantages of pursuing strategic fit in choosing which industries to diversify into? Page: 244 - 245 Learning Objective: 2 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation 113. Discuss the pros and cons of a strategy of unrelated diversification. Page: 252 - 256 Learning Objective: 3 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 114. Identify and briefly describe the six steps involved in evaluating a diversified company's business lineup and diversification strategy. Page: 257 - 258 Learning Objective: 4 Difficulty: Hard Taxonomy: Knowledge AACSB: Value Creation

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115. What does the industry attractiveness test involve in evaluating a diversified company's business lineup? Why is it relevant? Page: 258 - 261 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 116. What is the relevance of quantitatively measuring the competitive strength of each business in a diversified company's business portfolio and determining which business units are strongest and weakest? Page: 261 - 263 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 117. Briefly explain what is meant by each of the following terms: a.) relative market share b.) resource fit c.) a cash hog business d.) a cash cow business Page: 261; 266; 267 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 118. What are the advantages and benefits of using an industry attractive-business strength matrix to evaluate a diversified company's lineup of businesses? Page: 264 - 265 Learning Objective: 4 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 119. What is meant by the term resource fit as it applies to evaluating a diversified companys business lineup? Page: 266 Learning Objective: 4 Difficulty: Medium Taxonomy: Knowledge AACSB: Value Creation 120. Explain the difference between a cash cow business and a cash hog business. Page: 266 - 268 Learning Objective: 4 Difficulty: Easy Taxonomy: Knowledge AACSB: Value Creation 121. Shareholder interests are generally best served by concentrating corporate resources on businesses that can contend for market leadership. True or false? Explain your answer. Page: 270 - 271 Learning Objective: 1 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 122. Why is it pertinent in evaluating a diversified company's business lineup to rank a diversified companys businesses on the basis of their future performance prospects? Page: 270 - 271 Learning Objective: 4 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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123. Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, what are the five main strategic alternatives that it can employ to improve the performance of its overall business lineup? Page: 271; 273 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 124. Under what circumstances might an already diversified company chose to enter additional businesses and broaden its diversification base? Page: 272 - 273 Learning Objective: 5 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation 125. Under what circumstances might a diversified firm choose to divest one of its businesses? Page: 273 - 276 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 126. Under what circumstances might an already diversified company chose to pursue corporate restructuring? Page: 276 - 277 Learning Objective: 5 Difficulty: Hard Taxonomy: Comprehension AACSB: Value Creation

127. Identify and briefly describe at least four types of competitive advantages that can accrue to a multinational corporation pursuing related diversification. Page: 279 - 282 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation 128. A strategy of multinational diversification contains more built-in competitive advantage potential (above and beyond what is achievable through a particular businesss own competitive strategy) than any other diversification strategy. True or false? Explain and support your answer. Page: 282 Learning Objective: 5 Difficulty: Medium Taxonomy: Comprehension AACSB: Value Creation

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